Supreme Court threat means it ain’t over till it’s over, says Andrew Pugh
Complex restructuring hearings do not usually pull in the biggest crowds at the Court of Appeal (CoA). Yet last month’s hearing into the e2bn (£1.75bn) European Directories restructuring was so highly anticipated that dozens of observers were left standing in the aisles of Court 75 at the Royal Courts of Justice in London.
“It was probably the busiest courtroom I’ve ever been in,” comments one prominent restructuring partner.
At a High Court hearing held in September Mrs Justice Proudman had given a judgment in the case that threatened to turn the relationship between senior and junior lenders on its head.
European Directories, security trustee Barclays Bank and senior lenders including Lloyds Banking Group, RBS and Allied Irish Bank, had drawn up plans to restructure the company. Proudman J sided with the junior lenders, Australian fund managers AMP Capital Investors and Hastings Fund Management, which effectively blocked the restructuring plan.
The dispute involved a familiar line-up of City restructuring and litigators partners. European Directories was represented by Kirkland & Ellis partners Kon Asimacopoulos and Partha Kar. The pair have landed roles on some of the biggest restructurings of the past two years, including Almatis, Japan Airlines and Reader’s Digest.
Another familiar face was Allen & Overy partner Ian Field, who represented Barclays. Field also acted on the Alamtis case when he represented the senior lenders’ coordinating committee.
A Linklaters team led by partners Rebecca Jarvis and Yen Sum acted for the senior lenders.
European Directories is a telephone directory company formed in July 2005 when Yellow Brick Road Group was acquired for e1.8bn by a consortium led by Australian ADD Macquarie Capital Alliance Group, followed by several other acquisitions. Earlier this year the company failed to make its loan repayments, triggering the restructuring plan.
The dispute boils down to the documentation involved in the 2005 leveraged buyout, when the consortium was advised by Clifford Chance. More specifically, it centres on a single clause relating to the interpretation of an intercreditor release provision.
Since 2009 the market has used the Loan Market Association’s standard intercreditor agreement, but back in 2005 there were various versions of the agreement. The release provision essentially gives the security agent the power to enforce a restructuring plan and sell a business on free of debt, which often sees the junior lenders lose out.
Some claim the clause was badly written, although the consensus is that this would be a harsh judgement. One restructuring specialist tells The Lawyer: “The fact is that this was their standard wording in intercreditor agreements and you just couldn’t factor in how these things could unravel.
“A lot of these transactions were done in a very short timeframe. It’s easy to sit back now and dissect a provision, but at the time they were doing a lot of these deals very quickly, and you don’t go into a buyout thinking there’s going to be a full-scale distressed scenario.”
The junior lenders, represented by Quinn Emanual Urquhart & Sullivan partner Richard East, argued that the release clause meant the security agent could only trigger a sale of one business within the group at a time, which would be a lengthy and expensive process.
Ropes & Gray was drafted in before the CoA hearing to advise on the refinancing issues.
Opponents argued that the junior lenders were looking to capitalise on a technicality and essentially hold the senior lenders to ransom to secure a better settlement.
At the High Court on 23 September, Proudman J sided with the junior lenders. One of the biggest fears after the hearing was that junior lenders that lost money in previous restructurings featuring similar clauses would pursue retrospective actions. A number of ongoing restructurings also contain the same release provision – hence the big turnout in court.
Proudman J’s decision was seen as a major shock, and those involved in the case offer varying explanations.
“The original judge [Proudman J] was a charitable assets lawyer and she was a little out of her depth,” claims one partner. “I don’t think she was used to dealing with these sorts of contested provisions or able to understand the commercial context.”
Another partner strikes a more sympathetic note. “The case was expedited and she [Proudman J] didn’t have a long time to familiarise herself with it. She probably only had about 48 hours. She was more inclined toward a literal and not a commercial reading.”
At the CoA hearing on 22 October, Proudman J’s decision was overturned. The appeal judges said the court should make a commercial reading of the release clause and that it was never intended for junior lenders to have precedent over the interests of senior lenders.
One partner says: “This decision was important for what it avoided – it was about returning to the status quo rather than breaking new ground.”
According to sources involved in the case, almost as surprising as the first-instance decision in the High Court was East’s appearance in the press celebrating the High Court victory when a CoA hearing was inevitable.
“I think this shows that, in these kinds of cases, discretion is the better part of valour,” says one partner.
East told The Lawyer: “This was an extremely important case for the junior lenders and I believed the [High Court] decision was the right one and still do.
“I was asked for my view and gave it.”
It is not yet known for sure whether the case will move to the Supreme Court, but observers believe it is unlikely.
One source says: “If you look at past Supreme Court appeals, they haven’t been keen to hear cases of construction and interpretation, and there’s no new or novel point of law here.”
The Key Players
European Directories: Kirkland & Ellis partner Kon Asimacopoulos and Partha Kar. Instructed Brick Court Chambers’ Mark Hapgood QC.
Security trustee (Barclays Bank): Allen & Overy partners Ian Field and Marc Florent and associate Nicola Simson. Instructed 3-4 South Square’s Antony Zacaroli QC.
Senior lenders: Partners Rebecca Jarvis and Yen Sum and associates Katy Ralph and Karen Seng.
Instructed 3-4 South Square’s William Trower QC.
Junior lenders: Quinn Emanual Urquhart & Sullivan partner Richard East. Instructed 3-4 South Square’s Robin Knowles QC. Ropes & Gray partners Maurice Allen, Tony Horspool and Matthew Cox